The SEC last week announced that it has sanctioned several market participants in the penny stock industry, including attorneys who wrote offering documents as well as stock transfer agents, for their roles in various sham IPOs of microcap stocks. These are the latest in a string of penny stock enforcement actions since outgoing SEC Chair Mary Jo White announced the implementation of the Commission’s “broken windows” policy in 2013. That policy targeted both large and small issuers and market participants. The strategy has resulted in the SEC racking up its largest-ever volume of enforcement cases in fiscal year 2016.
In the first enforcement actions, the SEC alleged that a California-based securities lawyer wrote false and misleading registration statements in connection with five microcap IPOs, which were part of a scheme to transfer unrestricted shares to offshore market participants. The SEC also alleged that the CFO of American Energy Development Corp. (AEDC), one of the issuers in question, and the attorney who wrote opinion letters for the offerings made false and misleading statements. The market participants were barred from any further penny stock activity, and the attorneys were permanently suspended from appearing and practicing before the SEC. The SEC also suspended trading in shares of ADEC.
In the second action, the SEC alleged that Empire Stock Transfer, Inc., a Nevada-based stock transfer agent, and its supervisor of operations transferred several penny stock securities without restrictions to offshore nominees. The SEC alleged that the agent did so “despite red flags indicating the shares were likely part of an illegal operation,” and noted that the same transfer agent had previously enabled offshore entities involved in the illegal sale of unregistered penny stocks. Those offshore entities were the subject in a prior SEC enforcement action.
In both cases, the parties agreed to settle the charges without admitting or denying the SEC’s findings. Each of the market participants also agreed to pay fines ranging from $13,000 to $154,000.